To understand the significance of the Commission’s decision, we should consider four things.

First,the United States is one of the few countries that fully taxes the foreign income of its corporations. The current rate of 35 percent creates a large tax liability for U.S. companies, regardless of where they operate. The only consolation is that the system allows those companies to avoid double taxation by deducting the taxes they pay abroad from their U.S. obligations, when they bring their profits back to the United States.

Second, this country does not tax foreign income until it is brought home. And because many American technology companies have actually delayed doing this, the impression that emerges is that they are undertaxed and could easily afford to pay more.

Third, many European countries believe that the current rules for valuing transactions among corporate subsidiaries allow American companies to avoid paying taxes on the profits they make from European consumers. These so-called “transfer-pricing” rules are supposed to replicate prices that independent companies would agree to, but critics question whether that’s how it works in practice.

Fourth, many policymakers in Brussels have sought to dampen the pressure to lower tax rates in order to attract foreign and domestic investment. The Commission’s decision gives them the opportunity to address both concerns at once.

A country that raises its corporate tax rate normally would have to worry about its domestic companies moving to foreign lower-tax jurisdictions. Indeed, as the Information Technology and Innovation Foundation (where I am a fellow) has documented, many economic studies have shown a negative relationship between tax rates on the one hand, and productive investment, jobs and innovation on the other.

But for U.S. multinationals, that’s not so much the case. Because the United States taxes all of those companies' worldwide earnings -- and because our system allows them to deduct foreign taxes from their U.S. obligations -- they know they will eventually have to pay 35 percent of their profits, no matter what. This means that Apple may not care very much about which country gets the revenue. Apple, in fact, has less incentive to move toward low-tax countries just for the sake of it.

An unfortunate consequence of this scenario, however, is that if other countries can effectively target their tax laws toward American companies like Apple, they can then safely slice off larger shares of the companies’ U.S. tax liabilities. The Commission’s decision thus invites more European nations to do exactly that -- and it will come at the expense of U.S. taxpayers, not shareholders.

Warren is among those who have implied that the Commission would not have reached its ruling if the United States had not allowed Apple to defer paying taxes on foreign profits. In truth, however, the Commission’s logic does not depend upon whether or when this country imposes its tax. Even if Apple had faced an immediate U.S. tax of 35 percent, the Commission would presumably still have found that the company’s tax-planning did comply with transfer-pricing rules and that the low Irish tax rate constituted forbidden state aid.

The large sum of unrepatriated earnings that results just makes it easier for Apple now to pay a large tax liability to Europe; it does not have to scramble to raise the cash. But eliminating deferral this way will not change the underlying fact that high U.S. tax rates encourage other countries to collect more revenue from American companies, because foreign tax payments lower their U.S. tax liabilities.

Outside the United States, most international tax law is based on taxing profits where they are earned. There is no question that countries should reform the complex rules now governing transfer-pricing for transactions within multinationals. For the last several years, the Obama administration has been participating in a multilateral effort to address base erosion and profit shifting (known as “BEPS”) among multinationals.

But if the Commission is now going to unilaterally impose new understandings that calculate tax liability using other criteria, such as sales or payroll, rather than profits, then the goals of the BEPS process are moot. The United States should suspend its participation in the effort until it resolves this dispute with the Commission.

The Commission’s position on the taxing of U.S. technology firms is clear: The organization believes that those companies’ European tax liabilities should rise, even if their worldwide tax payments do not. This represents a direct threat to U.S. tax revenues. The federal government needs to aggressively fight this revenue grab and insist on compliance with existing tax treaties and transfer-price regulations. Otherwise, U.S. taxpayers will end up losing a lot more.

Joe Kennedy

Joe Kennedy is a senior fellow at the Information Technology and Innovation Foundation, a tech policy think tank. Kennedy was formerly the chief economist at the U.S. Department of Commerce.